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Yield Management

Yield Management. Chapter 9. Yield Management. “Selling the right capacity to the right customer at the right price” Business Requirements Limited Fixed Capacity Business environment where YM can help Ability to segment markets Perishable inventory Advance sales Fluctuating demand

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Yield Management

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  1. Yield Management Chapter 9

  2. Yield Management • “Selling the right capacity to the right customer at the right price” • Business Requirements • Limited Fixed Capacity • Business environment where YM can help • Ability to segment markets • Perishable inventory • Advance sales • Fluctuating demand • Accurate, detailed information systems Chapter 9 - Yield Management 1

  3. Ontario Public Parks System • Mission? • Fee: $7.50 per night Campsites Occupied Annual Total Per Day Summer Weekends 5,891 227/day Spring/Fall Weekends 8,978 173/daySummer Weekdays 6,129 67/day Spring/Fall FridaysRest of Season 4,979 25/dayTotal Campsites 25,997Total Revenue $65K Chapter 9 - Yield Management 3

  4. New Fee Schedule: $18.00 Summer Weekends $7.50 Spring/Fall Weekends $1.50 Summer Weekdays Spring/Fall Fridays Free Rest of Season (no rangers stationed) Results: Campsites Occupied $7.50 FeeSliding Fees Summer Weekends 5,891 5,215Spring/Fall Weekends 8,978 8,546Summer Weekdays 6,129 15,523 Spring/Fall FridaysRest of Season 4,979 - Total Campsites 25,997 29,284 >13%Total Revenue $65K $60K Expenses cut: no rangers stationed in Winter Chapter 9 - Yield Management 2

  5. Managerial Options • Supply Management • Capacity • Work-shift scheduling • Increasing customer participation • Adjustable (surge) capacity • Sharing Capacity • Personnel – cross training, part-timers Chapter 9 - Yield Management 4

  6. Managerial Options • Demand Management • Partitioning demand • Price incentives • Promoting off-peak demand • Develop complementary services • Yield Management Chapter 9 - Yield Management 5

  7. Known Demand • 5 5 5 50 30 Manufacturing capacity needed: 100/7 Service capacity needed: Depends on General Service Capacity Strategy • Provide: sufficient capacity at all times • Match: change capacity as needed • Influence: change demand pattern • Control: maximize capacity utilization Chapter 9 - Yield Management 6

  8. Services Versus Manufacturing • Capacity planning task more difficult • Inventory • Timing • Capacity planning mistakes (stock-outs) more expensive Chapter 9 - Yield Management 8

  9. Industries that Fully Use YM Techniques • Transportation-oriented industries • Airlines • Railroads • Car rental agencies • Shipping • Vacation-oriented industries • Tour operators • Cruise ships • Resorts • Hotels, medical, broadcasting Chapter 9 - Yield Management 9

  10. Elements of a Yield Management System • Overbooking • Pricing • Capacity Allocation • Distinct versus nested • Static versus dynamic Chapter 9 - Yield Management 10

  11. Overbooking Two basic costs: • Stock outs customers have a reservation and there are no rooms left • Overage customers denied advance reservation and rooms are unoccupied Chapter 9 - Yield Management 11

  12. Example: Hotel California • Stock outs: 0.8 x $150 = $120 • Overage: $50

  13. Table 9.1: Hotel California No-Show Experience No-Shows % of Experiences Cumulative % of Experiences 0 5 5 1 10 15 2 20 35 3 15 50 4 15 65 5 10 75 6 5 80 7 5 85 8 5 90 9 5 95 10 5 100

  14. Overbooking Approach 1: Using Averages In Table 9.1 the average number of no-shows is calculated by 0x0.05 + 1x0.10 + 2x0.20 + 3x0.15 +…+ 10x0.05 = 4.05. Take up to four overbookings.

  15. Overbooking Approach 2: Spreadsheet Analysis

  16. Overbooking Approach 3: Marginal Cost Approach Book more guests until: E(cost of dissatisfied customer) = E(cost of empty room) • Cost of dissatisfied customer *Probability that there are fewer no-shows than overbooked rooms = • Cost of empty room *Probability that there are more no-shows than overbooked rooms Chapter 9 - Yield Management 12

  17. Hotel California • Co/(Cs + Co) = P(Overbook  No Shows) Hotel Data • Cs = $120, Co = $50.00 • Co/(Cs + Co) = 29.% • Overbook 2 rooms • Table 9.1: Hotel California No-Show Experience • No-Shows % of Experiences Cumulative % of • Experiences • 0 5 5 • 1 10 15 • 2 20 35 29% Chapter 9 - Yield Management 13

  18. $ Percentage of Capacity Claimed Actual Overbooking Cost Curve revenue from regular bookings loss of revenue from unhappy customers linear decline non-linear decline 0 20 40 60 80 100 120 140 Chapter 9 - Yield Management 14

  19. Fig. 9.2 Dynamic Overbooking Overbooking Time to Event Event Occurs Reservations Start

  20. Capacity Capacity Allocation with Exogenous Prices Reservations Necessary Desirable 0 5 10 15 20 25 30 Days Before Event Chapter 9 - Yield Management 17

  21. Capacity Allocation with Exogenous Prices • Methods • Nested vs. Distinct • Static vs. Dynamic Chapter 9 - Yield Management 18

  22. Capacity Allocation with Exogenous Prices Example (Chancey Travel) Business capacity = 100Demand forecast: premium profit ($10,000/seat) demand: uniformly distributed (51, 100)[meaning: 2% chance demand = 51, 2% chance demand = 52,…, 2% chance demand = 100, average demand = 75] Discount price ($2,500/seat) demand: unlimited demand at this price – infinite discounters book earlier than premium Chapter 9 - Yield Management 19

  23. Static Methods • Fixed Number, Fixed Time Rules • Fixed Time Rule • Accept discount bookings until a specific date • Motivation • Distinct, Static System – Fixed Number Rule • Average of 75 premium bookings, so reserve • exactly 75 slots for premium customers • exactly 25 slots for discount customers Chapter 9 - Yield Management 20

  24. Static Methods • Fixed Number, Fixed Time Rules • Nested, Static system – Fixed Number RuleAverage of 75 premium bookings, so reserve75 slots for premium customersremaining 25 go FCFS • Example:85 premium and 15 passengers wish to book Distinct, Static system: 75 premium,15 discountNested, Static system: 85 premium,15 discount Chapter 9 - Yield Management 21

  25. Nested, static system – Fixed Number Rule • EMSR heuristic (Expected Marginal Seat Revenue) • Allocating first through 51st seatsrevenue per seat:100% certain of $10,000 premium vs. $2,500 discount Allocating 52nd seat 98% certain of $10,000 = $9,800 expected revenue vs. $2,500 discount Allocating 53nd seat 96% certain of $10,000 = $9,600 expected revenue vs. $2,500 discount Chapter 9 - Yield Management 22

  26. Nested, static system – Fixed Number Rule • 88th seat24% certain of $10,000 = $2,400 vs. $2,500 discount On average flight: 75 premium passengers 13 discount passengers 12 empty seats Optimal Allocation 87 seats premium, 13 seats discount • Rule:Accept discount passenger untilpr(spill) < discount revenue/premium revenue Chapter 9 - Yield Management 23

  27. Threshold Curve Analysis Forecasting from early reservations history Capacity 0 5 10 15 20 25 30 35 40 Chapter 9 - Yield Management 24

  28. Pricing and Capacity Allocation City Pair Airline Coach 21 14 7 Cheapest Wash.-Nashville USAir $598 414 210 158 79 Newark-Salt Lake Cont. 1,610 785 614 408 179 Dallas-Cleveland American 1,296 204 204 204 159 Memphis-Las Vegas N-west 1,388 463 351 351 149 • Effects: • Expands overall industry • Shifts consumer surplus to supplier • Two views • Using imaginative methods to expand the economy and give consumers what they want • Capitalist pig price gouging Chapter 9 - Yield Management 25

  29. Pricing and Capacity Allocation – Event • Uncapacitated Possible unit prices $100 110 90 Associated demand 100 80 120Total Revenue $10,000 8,800 10,800 • Capacitated With Two ClassesCapacity of 100 Discount class unlimited demand at $50Premium price $100 110 90Premium demand 100 80 100Premium revenue 10,000 8,800 9,000Discount revenue 0 1,000 0Total revenue $10,000 9,800 9,000 Chapter 9 - Yield Management 26

  30. Capacitated with Two ClassesCapacity of 100Discount class unlimited demand at $75Premium price $100 110 90Premium demand 100 80 100Premium revenue 10,000 8,800 9,000Discount revenue 0 1,500 0Total revenue 10,000 10,300 9,000Lesson: in the capacitated environment pricing depends on the relative demand/capacity relationships Pricing and Capacity Allocation – Event Chapter 9 - Yield Management 27

  31. Yield Management – Implementation • Alienating Customers • Difficulty of customer understanding • Customer cheating • Employee Issues • Limiting decision power • Sabotage: add, not subtract responsibility • Reward system: in-synch with managerial goals- Consistency across personnel and units • Exception processing • Monitoring • Cost/Time of Implementation Chapter 9 - Yield Management 28

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